When White Diamonds Won’t Cut It

IF there is a holiday gift almost guaranteed to make a recipient swoon with joy, it is a diamond. But while such stones remain appealing as jewelry, the value of certain colored diamonds has increased while traditional white diamonds have fallen.

Diamond dealers are talking about pink, blue and red diamonds as investments, citing a recent track record of double-digit returns. This new interest in such rare gemstones can make a holiday gift 10 to 20 times more expensive than a similar, high-quality white diamond. Yet there are others in the trade who question whether these stones will pay the dividends people imagine in the Christmases to come.

“Fancy colored diamonds are the flavor of the year — they’re hot, they’re sexy, they’re great,” said Martin Rapaport, chairman of the Rapaport Group, which is considered a primary source of diamond pricing information.

“If someone said, ‘I want to buy something great for my wife,’ I’d say, great, buy fancy colored diamonds; you’re a billionaire,” he added. “But anyone who wants to invest in the flavor of the month shouldn’t do it.”

The white diamonds that adorn engagement rings and will dangle from ears and wrap around bracelets this holiday season have fallen in value over the last year. Prices for one-carat diamonds have dropped 7.15 percent as of Dec. 1, according to an index Mr. Rapaport developed.

Mr. Rapaport said demand for white diamonds had dropped globally because of a slowing Chinese economy, currency devaluation in Russia and low oil prices in the Middle East. Yet on the supply side, the cost of rough, white diamonds has stayed high, which has hurt the rest of the diamond trade’s ability to make a profit.

During the same time, colored diamonds have surged in value. Buyers have sought them out for their beauty, extreme rarity and investment potential.

The best-known pink diamonds, for example, are from the Argyle diamond mine in Western Australia. That mine, which supplies 90 to 95 percent of the world’s pink diamonds, will be exhausted by 2020, and the scarcity has driven up prices.

“Argyle pink diamonds outperform any other,” said Leibish Polnauer, president of Leibish & Company, a colored-diamond dealer. “They’re less and less available and more and more in demand. Fifteen years ago we bought Argyle pink diamonds for $10,000 a carat. Today it’s $150,000, $200,000, $250,000 a carat.”

Dealers say wealthy buyers in volatile economies view rare, colored diamonds as a hedge against economic uncertainty. A diamond can also be a discreet way to put a tremendous amount of money into something smaller than an aspirin tablet.

“You can buy a large house for $1 million, or about one-half of a carat of a red diamond,” said Yaniv Marcus, founder of the Diamond Investment and Intelligence Center. “A one-carat red diamond could be valued at $2.5 million.”

At the highest end, colored diamond prices have reached a level that rivals rare art works like Amedeo Modigliani’s “Nu Couché,” which sold for $170.4 million at the fall auctions.

“It’s all about rarity,” said Frank Everett, vice president and sales director in the jewelry department at Sotheby’s. “The best ones stand out like a great piece of art.”

In the last year, Sotheby’s has sold two well-known blue diamonds for record-setting prices. A 9.75-carat blue diamond that belonged to the socialite Bunny Mellon sold in November 2014 for $32.6 million — or $3.3 million a carat. Last month, the auction house sold the 12-carat Blue Moon for $48.5 million — or just over $4 million a carat.

Those prices far outstrip the 100-carat white diamond Sotheby’s sold in April for $22 million — or $220,000 a carat.

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Jordan Fine, president of JFine Inc., a dealer that specializes in colored diamonds.CreditChang W. Lee/The New York Times

More broadly, a one-carat fancy pink diamond in a cushion cut is 11.50 times as expensive as a one-carat cushion-cut white diamond that has been judged to be internally flawless and carries the highest color rating, said Eden Rachminov, head of the advisory board of the Fancy Color Resource Foundation. A blue diamond is 20.8 times as expensive as a similar white diamond.

But it is not so simple to jump into the trade just based on the soaring prices. Investors also need to understand the very different ways white and colored diamonds are judged.

With white diamonds, it is the widely known measures of color, cut, clarity and carat weight that drive prices. But investing in white diamonds is a lot like picking quality stocks. There are established measures of quality, relatively transparent pricing, knowable transaction costs and liquidity, at least in smaller carat sizes.

Mr. Rapaport views investments in white diamonds as a way to capitalize on the growth of the global middle class who will buy them as gifts and drive prices back up.

In the world of colored diamonds, what determines value is more subjective. The range of prices for any given colored diamond can vary wildly, corresponding not only to the rarity of their colors but also to the vividness of the color itself. (The so-called chocolate diamonds that mall jewelers are advertising are not considered investments; until fairly recently, they were used for industrial purposes because they are so common.)

“It’s the strength of the color,” said Jordan Fine, president of JFine Inc., a dealer that specializes in colored diamonds. “A light yellow could be $3,000 a carat and a vivid yellow could be $15,000 a carat. A one-carat light pink could be $75,000 to $700,000 a carat for a vivid pink.”

He added, “It’s hard to fathom how expensive and rare that little stone is.”

Yet discerning the vividness of a colored diamond can be more art than science. If white diamonds are likened to stocks, colored diamonds are private equity investments, with all the risk and reward such forays entail.

“Colored diamonds don’t have a price list or somebody managing the value,” Mr. Marcus said. “It’s a true supply-and-demand free trade. It’s like real estate. Its value is what someone will pay for it.”

Mr. Rachminov said the prices of yellows have been stable, tending to track the stock market, but the pinks and blues have soared in value, which has made some industry experts like Mr. Rapaport skeptical. (Red diamonds are at the top but they are exceedingly rare.) “There’s more interest from high-net-worth individuals, just like there’s more demand for art and wine and luxury items in general,” Mr. Rachminov said.

Colored-diamond dealers talk of the stones as a store of value, and they have shown to be over decades. But they are not the easiest investments to sell.

“The approach should be long term,” Mr. Marcus said. “It’s not a trading commodity first of all because of liquidity. The return is exponential over time.”

He also divides colored diamonds into two categories: jewelry and investments. This is by quality but also by the color itself. He said there are not enough orange, green, violet, and purple diamonds to create the liquidity for an investment market. Therefore, most investors focus on blue, pink and red diamonds.

Yet that line between jewelry and investment can get blurred. Sam, who owns a medical business in New Jersey but asked that his last name be withheld for security concerns, has amassed a collection of dozens of colored diamonds. He bought his first pink diamond in a ring as a gift for his wife in 2005. Then he bought a green diamond and realized that the stones could be used to finance his children’s college education.

“I put some money into that green diamond and that started a collecting bug,” he said. “Then it became trying to find some of the best examples of different colors of vivid colored diamonds.”

Mr. Fine, who sold Sam many of his stones, said some of his pink diamonds had doubled in value in 10 years. But Sam said he also was aware that his timing was right.

In 2007, he bought a half-carat vivid pink diamond in the Argyle tender — an annual private auction of the best pink diamonds from the mine. But this year, he bid four times the price for a smaller pink diamond of lesser quality and lost.

Still, as with any thing of beauty, it can be a lot harder to look rationally at sparkling colored diamonds than a list of company names in a securities portfolio.

Sam said he had amassed a collection valued at $6 million of 41 colored diamonds in almost every different hue but can’t bear to sell them. “Now I keep them securely in a vault and I go down and look at them,” he said. “It’s a lot of concentrated wealth in a thing of great beauty.”

Correction:

The Wealth Matters column on Saturday about the investment value of colored diamonds included a quotation from Yaniv Marcus, founder of the Diamond Investment and Intelligence Center, that misstated how much of a red diamond could be purchased for $1 million. About a half a carat of a red diamond, not 1/16 of an ounce, would cost that amount. The column also miscalculated the equivalent value of a 100-carat white diamond that recently sold at Sotheby’s. The diamond sold for $22 million, or $220,000 a carat — not $2.2 million a carat.

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